November 21, 2008

In spite of all the efforts of governments and central banks worldwide, a broad credit contraction is underway and it will continue until savings start to grow again. There is some muddled talk about money printing leading to hyperinflation. It is perfectly true that central banks are pumping money like there is no tomorrow into the banking system, and politicians seem hell-bent on propping up failed companies such as GM, Ford and Chrysler with direct loans, but authorities cannot force banks to lend, nor people to borrow. This is what is termed, 'pushing on a string.' Historically, there appears to be an inverse relationship between the money base and broader credit aggregates. Following the 1929 crash, expansion of the money base accompanied credit contraction. Then, as now, the Federal Reserve was seeking to fight the contraction.

As economists of the Austrian School have argued, the problem is not the bust, but the preceding boom. The current deflation, like all previous deflations, will continue until equilibrium is restored between savings and the demand for credit. Governments and central bankers may claim that this time it will all be different. Yet all their efforts to boost consumption and attack thrift are only replays of old delusions. In the real world, Mr Market and Mr Margin Clerk continue to hold sway.

November 06, 2008

The Baltic Dry Index has now fallen to 815. Back in June, 2008, it stood at 11,793. In any language, this is a massive contraction in the movement of raw materials for manufacturing. Currently, fund managers and other stock market participants are paying no heed. I am not a forecaster, but one might observe that bear markets, in their early stages, are crowded with optimists.

Here are the latest "Big Money" poll results as reported by Barrons for Monday November 3:

It is interesting to observe Jim Rogers urging all and sundry to get out of the US Dollar just after it had made that March low. Yet, it appears that the declining US Dollar had been inversely related to economic expansion and credit growth over the last few years.

A close perusal of the first link shows that US broad money growth peaked out shortly before the US Dollar made its March low. Now that the broad money growth has collapsed, may we expect the upward trend of the US Dollar, now seemingly well established, to continue?

If US housing and other asset prices continue to decline, it seems logical to expect that broad money will continue to shrink, notwithstanding all the efforts to sustain bank liquidity via repurchase agreements and borrowings at the Federal Reserve discount window. In the context of diminishing collateral to sustain borrowing, a stronger US Dollar paradoxically portends bad news on the deflation front.

August 21, 2008

In relation to the military operation by Britain and France against Egyptian forces during the 1956 Suez crisis, the recently retired Sir Winston Churchill was quoted as saying, "I am not sure I should have dared to start; but I am sure I should not have dared to stop."

I think that a reasonable analogy can be drawn in relation to Nato expansion to encompass the Ukraine and Georgia. Moose's arguments have force, but as one might say, 'we have crossed the Rubicon.' A retreat now would reinforce Russia in its autocracy and gangsterism, and, incidentally, send a message of weakness to our Islamist enemies. Re Spengler's comments about Saakashvili of Georgia. Me thinks he protests too much. Spengler is exploiting imperfection in order to create equivalence.

Russia faces the choice between an ultimately self-destructive isolationism and linkage with Western Europe in an association of independent liberal democratic states. Many years ago, De Gaulle envisaged a Europe from the Atlantic to the Urals. Having come this far, the West cannot now retreat. On the contrary, it could exploit the opportunity if only the Western Europeans could finally recognize the absurdity of the European Union structure.

August 16, 2008

We are all addicted to forecasts. The soothsayer, the oracle, and the entrails of chickens played their allotted role in supposedly divining the future in more primitive times. Today, we may laugh at these displays of superstition. Yet, we seem to take seriously those "experts", who purport to make forecasts of climate change over the next thirty years, or of the economy and financial markets over the next twelve months, or even two years.

July 01, 2008

The oil price spike has heightened public awareness of inflation. Certainly, consumer prices, especially staples, have risen markedly over the last twelve months. However, popular awareness of a trend occurs near the end rather than the beginning.

Inflation is reflected in rising asset prices, and, over time, in rising consumer prices. However, its essence is credit expansion. Can official action sustain credit growth into the indefinite future?

June 10, 2008

Alan Greenspan was a prime model of opaque verbiage during his term as Federal Reserve Chief, but his memoirs, THE AGE OF TURBULENCE: Adventures In A New World, published in 2007, provide crisp entertaining reading. I strongly recommend his book as an important background to the current contraction under way in the United States.

May 25, 2008

The belief that the China growth story will continue into the indefinite future is so deeply ingrained at both the political and business levels that any dissent is either ignored or summarily dismissed. Upon this belief rests the hope that we will escape the worst of any US economic slowdown.

April 20, 2008

The more I think about that, er, "summit of ideas", the more I am reminded of that "organizational weapon" which totalitarian Communism wielded in its bid for power in the Western Democracies. I recall the front organizations, the "useful idiots" who served as the public faces of such bodies, whilst the real powers that be kept themselves largely in the background.

Well, the rest of us may have started to forget, but the former pro-communist left certainly remember. So how do you "organize" a summit?